What is Credit and How Can You Improve Your Score?
Posted on: 03/27/2018 at 9:00 a.m.
Having good credit is immensely important.
So what is credit and how can you ensure you have good credit? We’re here to debunk the mystery for you.
What is Credit?
According to the consumer credit reporting agency Experian, “Credit is borrowed money that you can use to purchase goods and services when you need them.” When you use credit, you enter an agreement with your credit grantor that you will pay back the borrowed money at a specific time with potential interest charges for borrowing.
From your money-borrowing habits, you are given a credit score, which is essentially a grade given that demonstrates your credit-worthiness in comparison to others. Credit scores range from 300-850, with a score of 700 or above being considered a good credit score.
Why is Credit Important?
Having a good credit score is necessary for some purchases that are too large to make out-of-pocket, such as buying a car or house. When these purchases come around, your ability to receive a loan that will allow you to make your purchase will be dependent on your credit score. With a bad credit score or poor credit history, you may be denied a loan.
How Can You Improve Your Credit Score?
So what can you do to raise your credit score or earn a good score? Here are a few simple tips for gradually increasing your credit rating.
1. Have Credit
The most important part of building good credit is having credit history in the first place. Building credit by opening a credit card and paying it off in full each month is the best way to start building a solid history of credit.
2. Track Your Credit Balance
Making full payments on any credit you are racking up will prove your credit-worthiness more quickly and effectively than making the minimum payments. Fight the temptation to have more spending money and pay off your full balance to prove that you only take on credit that you can pay off.
3. Pay Your Balances On Time
Nothing proves your inability to handle credit more than making late payments on your credit statements. Set a reminder on your phone, write the date down in your planner, or do whatever you need to remind yourself to pay your credit bills on time. If you don’t, your credit score will suffer. Pro tip: For many bills, you can set up an automatic payment. Talk to your lender and see if your payment date is flexible. You may be able to set a date that aligns with the day you get paid.
4. Mind Your Credit Limits
Using credit is an important part of building your credit score, but using too much credit can be a warning to those determining your credit score. When you receive your monthly maximum credit limit, do not consider that amount to be the amount you should be spending. Using credit frugally will give a better impression to your credit rating.
5. Minimize Your Credit Cards
Having a higher balance on one credit card is better for your credit score than having small balances on many cards. Keep this in mind when you consider how to pay off your credit and when opening new credit cards.
6. Keep Old Debt on Your Credit Report
The greater your credit history, the more potential you have for a higher rating. When you have paid off debt in a manner that reflects good credit handling, keep it on your report. But do remove credit history that is paid off but has negative reflections on your credit handling, such as late payments or large outstanding balances.
7. Plan Ahead on Your Credit Needs
When you apply for credit, your score takes a small hit. Considering this, try to not take out too many forms of credit at once; this is a red flag to credit issuers. When considering large purchases coming up, either stagger your loan applications or consider applying for one loan that can support all of your financial needs. Each situation is variable, so do your research before making these big decisions.
If you’re looking to improve your credit score, consider opening a Visa credit card with us at NSP Credit Union. This card provides competitive fixed rates, no annual fee, and will help you establish or reestablish your credit history. Learn more about our Visa credit card offer on our website.